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Sir why do we review depn rates applied in relation to:
-asset lives
-residual values
-replacement policies
-past experience of gains and losses on disposal
-consistency with prior years and accounting policy
-possible obsolescence
How does it help us check valuation?
ThanksThe valuation of PPE is assumed knowledge from F3. The carrying amount (“valuation”) of a tangible non-current asset is cost (or revalued amount) less accumulated depreciation. Depreciation is an accounting estimate based on management’s assumptions of the first 3 things you list.
Consider just one asset – a delivery van – let’s say management depreciates at 12.5% on a straight line basis assuming no residual value, The company has a lot of such vans – think of evidence that will allow the auditor to form an opinion whether this policy is appropriate or could give rise to material error. For example, what if:
– the vans are still in use after 10 years?
– the vans are replaced every 5 years?
– vans are exchanged after 8 years and have a trade-in value?
– three vans were involved in collisions and are rusting at the back of the delivery yard?I am sure you can think of more ideas yourself in relation to different assets.
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